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April 2009

Washington Post Crashed-and-Burned Watch

Matthew Yglesias says that if you follow the operating procedures of the Washington Post "you could do an entire article that consisted of accurately quoting people who are lying, and wind up badly misinforming your readers."

In the Len Downie-Fred Hiatt Post, Matt, that's not a bug--that's a feature:

Matthew Yglesias: Post Reporter Says It’s Not His Job to Check the Accuracy of People He’s Quoting: You rarely see the kind of full-throated defense of journalism-as-stenography that The Washington Post’s Paul Kane offers up here:

New York, N.Y.: Paul, do you care to defend yourself against this criticism from Media Matters? “In an April 9 article about Democrats’ legislative priorities, The Washington Post wrote, ‘Democrats are sure to incite Republicans if they adopt a shortcut that would allow them to pass major health-care and education bills with just 51 votes in the Senate, where Democrats are two seats shy of the filibuster-proof margin of 60 seats. The rule, known as ‘reconciliation,’ would fuel GOP charges that (President) Obama has ditched bipartisanship.’ The article, by Paul Kane and Shailagh Murray, then quoted Sen. Olympia Snowe (R-ME) saying, ‘If they exercise that tool, it’s going to be infinitely more difficult to bridge the partisan divide.’ However, Kane and Murray did not mention that congressional Republicans — including Snowe herself — voted to allow the use of the budget reconciliation process to pass major Bush administration initiatives. Indeed, Murray herself noted in an April 1 article that ‘(a)dvocates defend reconciliation as a legitimate tool used more often by Republicans in recent years, most notably to pass President George W. Bush’s tax cuts.’ ”

Paul Kane: I’m sorry, what’s to defend? Someone tell Media Matters to get over themselves and their overblown ego of righteousness. We reported what Olympia Snowe said. That’s what she said. That’s what Republicans are saying. I really don’t know what you want of us. We are not opinion writers whose job is to play some sorta gotcha game with lawmakers.

This is fairly simple. What we want is that if you’re going to quote someone saying something dishonest, you report the fact that they’re lying. Or if in this case you’re quoting someone who’s arguably being hypocritical, you inform readers of the broader context. Surely a person assessing the merits of a Republican argument that majority voting in the Senate is pernicious would want to know that when Republicans were in the majority they saw things differently. The crux of the “debate” over reconciliation is that whichever party happens to be in the majority at any given time is inclined to take an expansive view of the circumstances under which it should be used. It’s not possible for Post readers to understand what’s happening absent that context.

This isn’t a matter of “gotcha games,” it’s crucial. Otherwise, operating by Kane standards you could do an entire article that consisted of accurately quoting people who are lying, and wind up badly misinforming your readers.

Hoo Boy: We Need Better Senators Badly

Pat Garofolo on Senator Blanche Lincoln:

Think Progress: Lincoln’s $250 billion estate tax plan would cut taxes for only 60 ’small businesses.’: Last week, 10 Democrats in the Senate joined all 41 Republicans in voting for a $250 billion proposal to cut estate taxes, designed by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ). More than 99 percent of this cost would go to the inheritors of estates worth over $7 million. Touting the tax cut in a press release, Lincoln claimed that it was “aimed at farms and small businesses.” However, according to an analysis by the Tax Policy Center, Lincoln’s $250 billion proposal would save just 60 small businesses or farms from the estate tax:

An always charged issue is how the estate tax affects small farms and family-owned businesses. We estimate that under the Obama proposal, 100 family farms and businesses [a year] would owe tax.... The Lincoln-Kyl proposal would cut the number to 40.

According to the Congressional Budget Office, “almost all such estates are able to pay the tax bill without having to sell business assets.”

Captain Swing



Your name is down amongst the Black hearts in the Black Book and this is to advise you and the like of you, who are Parson Justasses, to make your wills. Ye have been the Blackguard Enemies of the People on all occasions, Ye have not yet done as ye ought,



This is to acquaint you that if your thrashing machines are not destroyed by you directly we shall commence our labours.

Signed on behalf of the whole,


The Triumph of General Ludd

From 1819?

The Triumph of General Ludd:

No more chant your old rhymes about old Robin Hood
His feats I do little admire
I'll sing the achievements of General Ludd
Now the hero of Nottinghamshire

Those engines of mischief were sentenced to die
By unanimous vote of the trade
And Ludd who cannot a position defy
Was the grand executioner made

Whether guarded by soldiers along the highway
Or closely secured in a room
He shivers them up by night and by day
And nothing can soften their doom

Shall the whole team of humble no longer oppressed
And shall Ludd sheath his conquering sword
Be his grievance instantly met with redress
Than peace shall be quickly restored

Let the wise and the great lend their aid and advice
Never ere their assistance withdraw
Till full-fashioned work at the old-fashioned price
Is established by custom and law

DeLong Smackdown Watch: Jon Henke Edition Intellectual Garbage Pickup--John Henke at "The Next Right" Edition

UPDATE: Jon Henke writes:

I must object to the caricature you've made of my views in your recent post.

I'm not a Bush cheerleader. I never voted for him, and have been a vocal critic. I know you probably haven't read much of my writing - I object to that, too! - but I've been quite critical of the Republican nonsense about tax cuts solving revenue problems, as well as the game of fiscal chicken they're playing by cutting taxes and increasing spending.

What's more, I've actually pointed out previously that Krugman has been quite consistent in arguing that, while fiscal policy is generallly an inappropriate tool to address recessions, it becomes a more legitimate tool when we've run out of monetary rope. Indeed, in that post you cite, I point out that those fiscal stimulus arguments are certainly legitimate.

However, the deficits over the upcoming decade are massive, and we're hearing the same deceptive "but we'll cut these massive deficits in half" rhetoric and number-manipulation that we saw before.

I certainly understand why you haven't exactly been following what I write. I mean, I think that's a tragedy, etc, etc, but I understand you probably have things to do beyond hanging on my every word. But, even though I'm sure it is unintentional and not personal, you have misunderstood and misrepresented me.

I only write to point that out because I like and respect you, and I hate to think our rare intersection would be a misunderstanding.

Jon is right.

I am clearly far too cranky this evening.

I apologize.

Nevertheless, there are two important points:

  1. We need to worry about the deficits in 2015, 2020, 2025, and beyond--not about the deficits in 2009, 2010, and 2011.

  2. The key to dealing with the deficits in 2015, 2020, 2025, and beyond is--you guessed it--health care. That is the entire ballgame.

rmoomaw writes:

What in your opinion is wrong with this analysis?

John Henke, Doubling Down on the Deficit Disaster | The Next Right.

I reply:

r (if I may):

  1. The long-run deficits that John Henke decries are not much, much worse than they were in 2003--they are somewhat better. Obama has cut the long-run deficit. Bush boosted it. It remains a big problem--but it's not a problem of Clinton's or Obama's or Pelosi's or Reed's creation, it's a problem created by Bush and his cheerleaders like Jon Henke.

  2. Henke accuses Paul Krugman of inconsistency for worrying about deficits in 2003 but not about short-run deficits now. If the 2003 unemployment rate had been forecasted to be above 10%, Krugman would have been calling for bigger deficits in 2003 as well. I don't know whether Jon Henke is foolish or mendacious, but "cyclical deficits when the economy is in deep recession good; long-term structural deficits bad" ought not to be too complex a doctrine to be grasped by someone who claims to be speaking for the Next Right.

I think that takes care of it.


Brad DeLong

Simple Keynesianism for Monetarists: A Primer

Tyler Cowen's Email to Brad DeLong is in response to this piece in progress. I'm still not sure whether it is a work of genius, a useful exercise in cross-community communication, a weird exercise like trying to run the 50-yard dash on your hands, or just a mistake:

Download now or preview on posterous

Posted via email from at Brad DeLong's Scrapbook

Yet More Things I Have Never Read and Clearly Should Have

Things to Read:

  • Stephen Holmes, “The Secret History of Self-Interest”
  • Allan Silver, “’Two Different Sorts of Commerce’ – Friendship and Strangership in Civil Society”

Things to Reread:

  • Paul Krugman, Introduction to The General Theory of Employment, Interest and Money
  • T.H. Marshall, “Citizenship and Social Class”
  • Daniel Bell, "The Public Household" (from The Cultural Contradictions of Capitalism)
  • Friedrich Hayek, “The Use of Knowledge in Society”

Jeff Weintraub's History of Economic Thought Syllabus at UPenn:

Download now or preview on posterous

Posted via email from at Brad DeLong's Scrapbook

Against Misrepresentation the Bloggers Themselves Contend in Vain...

Henry Farrell sends us to Julian Sanchez, who says highly intelligent things:

Making a hash of it — Crooked Timber: Julian Sanchez on climate change debates.

Sometimes, of course, the arguments are such that the specialists can develop and summarize them to the point that an intelligent layman can evaluate them. But often—and I feel pretty sure here—that’s just not the case. Give me a topic I know fairly intimately, and I can often make a convincing case for absolute horseshit. Convincing, at any rate, to an ordinary educated person with only passing acquaintance with the topic. A specialist would surely see through it, but in an argument between us, the lay observer wouldn’t necessarily be able to tell which of us really had the better case on the basis of the arguments alone—at least not without putting in the time to become something of a specialist himself.

Actually, I have a plausible advantage here as a peddler of horseshit: I need only worry about what sounds plausible. If my opponent is trying to explain what’s true, he may be constrained to introduce concepts that take a while to explain and are hard to follow, trying the patience (and perhaps wounding the ego) of the audience.

Come to think of it, there’s a certain class of rhetoric I’m going to call the “one way hash” argument. Most modern cryptographic systems in wide use are based on a certain mathematical asymmetry: You can multiply a couple of large prime numbers much (much, much, much, much) more quickly than you can factor the product back into primes. Certain bad arguments work the same way—skim online debates between biologists and earnest ID afficionados armed with talking points if you want a few examples: The talking point on one side is just complex enough that it’s both intelligible—even somewhat intuitive—to the layman and sounds as though it might qualify as some kind of insight. (If it seems too obvious, perhaps paradoxically, we’ll tend to assume everyone on the other side thought of it themselves and had some good reason to reject it.) The rebuttal, by contrast, may require explaining a whole series of preliminary concepts before it’s really possible to explain why the talking point is wrong. So the setup is “snappy, intuitively appealing argument without obvious problems” vs. “rebuttal I probably don’t have time to read, let alone analyze closely.”

This is both true and smart (as is Julian’s work more generally; in my opinion, he is by far the most consistently interesting and intelligent of the young sort-of-libertarian opinion journalist set).

New York Times Crashed-and-Burned Watch: Fire Andrew Rosenthal. Fire Andrew Rosenthal Now

Zachary Roth:

Times Editor: Lack Of Disclosure On Merkin Op-Ed Is No Big Deal: Here's another one to add to the growing list of "newspapers acting badly"...

Late last month, the New York Times published an op-ed by Daphne Merkin, a contributing writer to the Times Magazine, on the Bernie Madoff mess. The curious premise of the piece seemed to be that Madoff's "victims" (the quote marks are Merkin's) aren't really blameless, since "no one was holding a gun to anyone's head, saying sign up with Mr. Madoff or else." The argument seemed tendentious at best -- but there was a bigger problem. As numerous bloggers quickly pointed out, Merkin's parenthetical disclosure -- "I did not know Mr. Madoff nor did I invest with his firm, but have a sibling who did business with him" -- didn't come anywhere close to fully informing readers about her personal tie to the case. That sibling is Ezra Merkin, the financier and former chairman of GMAC, who was the second-largest institutional investor in Madoff's funds, losing billions of other people's money....

[T]he Times doesn't appear to agree that the disclosure was inadequate enough to fix -- even now that Ezra Merkin has been formally charged.... Andrew Rosenthal told TPMmuckraker that he had no plans to revisit the issue.... "I answered this call against my better judgment," he said. "I thought you had something more substantive you wanted to talk about." Pressed as to whether or not he viewed the issue of disclosure in the Merkin op-ed as substantive, Rosenthal replied: "I'm just not interested in discussing it."... Rosenthal's and the Times' siege mentality strategy is doubly puzzling given that initially he appeared to agree that there should have been more disclosure. Two days after the op-ed appeared, Gawker posted an email from Hoyt to a reader, in which the public editor wrote that "much more needed to be spelled out" about Daphne Merkin's conflict, and added that Rosenthal "agrees that there should have been greater disclosure," but "does not contemplate an editor's note"...

Economics 202b: Prologue: History of Macroeconomic Thought, April 2-9

Lecture Notes:

Readings: In the Shadow of Milton Friedman:

Problem Sets:

Problem Set 1 due April 6: Romer 5.1, 5.3, 5.4, 5.9, 5.14, 5.15.

Problem Set 2 due April 13: Romer 6.2, 6.6, 6.13, 6.15, 10.1, 10.6, 10.14, 10.16.

Maynard Keynes Might Say: Real Wages and the Great Depression

From RJW:

Maynard Keynes comments on Ohanian and Cole

in the short period, falling money-wages and rising real wages are each, for independent reasons, likely to accompany decreasing employment; labour being readier to accept wage-cuts when employment is falling off, yet real wages inevitably rising in the same circumstances on account of the increasing marginal return to a given capital equipment when output is diminished."

General Theory Chapter II section 2.

As you know, one didn't have to wait for Blanchard and Kiyotaki or for New Keynesians or--well read Keynes to find the argument that real wages are determined (certainly were determined in the 20s and 30s anyway) by firms when they set prices and must be high when demand is low.

I personally don't share Keynes' certainty that, in the short run, employment is a decreasing function of real wages and vice versa. However, he expressed no doubt whatsoever on the point and managed to explain the Great Depression without appealing to trade unions. I think that if he had known that a reputable professor at UCLA had the idea that the US had extraordinarily huge unemployment in 33 because it had extraordinary strong unions he would have lowered his opinion of Americans (hard as that is to imagine).

There is an argument that the "Red Scare" Palmer raids of the early 1920s plus the fact that nominal wages had just been boosted by wartime inflation made it easy in the early 1920s to shrink nominal spending during the post-WWI deflation without causing a Great Depression--nonfarm unemployment peaked at only 16%. But to me, at least, the spectacle of a market system that is capable of rapid nominal adjustment only under a police state is not to attractive.

May We Please Retire George Will and Fred Hiatt?

The Washington Post needs to decide whether it is in the information business or not. It can't be in it as long as Fred Hiatt and George Will are writing for it.

But news reporters are pushing back:

Juliet Eilperin and Mary Beth Sheridan:

New Data Show Rapid Arctic Ice Decline: The satellite data released by NASA and the National Snow and Ice Data Center show that the maximum extent of the 2008-2009 winter sea ice cover was the fifth-lowest since researchers began collecting such information 30 years ago. The past six years have produced the six lowest maximums in that record, and the new data show that the percentage of older, thicker and more persistent ice shrank to its lowest level ever, at just 9.8 percent of the winter ice cover.

"We're seeing an ice cover that's younger and that's thinner as we head into summer," Walt Meier, a scientist at the National Snow and Ice Data Center, said in a telephone news conference. "It's been a pretty sharp decline."

The new evidence -- including satellite data showing that the average multiyear wintertime sea ice cover in the Arctic in 2005 and 2006 was nine feet thick, a significant decline from the 1980s -- contradicts data cited in widely circulated reports by Washington Post columnist George F. Will that sea ice in the Arctic has not significantly declined since 1979...

Chris Mooney:

Climate Change's Myths and Facts: [The writings of] Post op-ed columnist George F. Will.... Can we ever... recognize the real conclusions of science and... distinguish them from scientific-sounding spin or misinformation?... [T]he only hope involves taking a stand for a breed of journalism and commentary that is not permitted to simply say anything; that is constrained by standards of evidence, rigor and reproducibility that are similar to the canons of modern science itself.

Consider a few of Will's claims.... Will suggested that widespread scientific agreement existed at the time that the world faced potentially catastrophic cooling.... [But r]eviewing studies between 1965 and 1979, the authors found that "emphasis on greenhouse warming dominated the scientific literature even then."... It's misleading to draw a parallel between "global cooling" concerns articulated in the 1970s and global warming concerns today. In the 1970s, the field of climate research was in a comparatively fledgling state....

Will wrote that "according to the University of Illinois' Arctic Climate Research Center, global sea ice levels now equal those of 1979." It turns out to be a relatively meaningless comparison, though the Arctic Climate Research Center has clarified that global sea ice extent was "1.34 million sq. km less in February 2009 than in February 1979." Again, though, there's a bigger issue: Will's focus on "global" sea ice at two arbitrarily selected points of time is a distraction. Scientists pay heed to long-term trends in sea ice, not snapshots in a noisy system....

Will also wrote that "according to the U.N. World Meteorological Organization, there has been no recorded global warming for more than a decade."... Will probably meant that since 1998 was the warmest year on record according to the WMO -- NASA, in contrast, believes that that honor goes to 2005.... Yet such sleight of hand would lead to the conclusion that "global cooling" sets in immediately after every new record temperature year, no matter how frequently those hot years arrive or the hotness of the years surrounding them.... [I]t's far more relevant that out of the 10 warmest years on record, at least seven have occurred in the 2000s...

Andrew Freeman:

Will Misleads Readers on Climate Science - Again - Capital Weather Gang: [S]yndicated Washington Post columnist George Will... misleading reporting of climate science... three columns on global climate change.... The Post's ombudsman, Andrew Alexander, found some problems with the piece, but did not find evidence that Will committed factual errors or distorted facts in the February 15th article.... Will... provides readers with misleading climate science information that conflicts with what scientists know about the climate system.... Will's climate change columns are a case study in how one can cherry pick scientific data to fit their own agenda.... [M]an made global warming is not likely to take place in a monotonic manner, in which each year is warmer than the next... there will be zigs and zags.... As Easterling and Wehner note, the record warm year of 1998 occurred during an unusually strong El Nino event, which exerted its own natural warming influence.... Will's previous two columns contained another misleading statement about climate science, this time concerning sea ice.... George Will's recent columns demonstrate a very troubling pattern of misrepresentation of climate science.... Editors and fact checkers are there to ensure that publications like the Washington Post don't print factually incorrect information...

Let's retire Andrew Alexander as well.

The Great Ricardian Equivalence Misunderstanding

Paul Krugman attempts to provide some aircover:

One more time: Brad DeLong is, rightly, horrified at the great Ricardian equivalence misunderstanding. It’s one thing to have an argument about whether consumers are perfectly rational and have perfect access to the capital markets; it’s another to have the big advocates of all that perfection not understand the implications of their own model.

So let me try this one more time.

Here’s what we agree on: if consumers have perfect foresight, live forever, have perfect access to capital markets, etc., then they will take into account the expected future burden of taxes to pay for government spending. If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.

But suppose that the increase in government spending is temporary, not permanent — that it will increase spending by $100 billion per year for only 1 or 2 years, not forever. This clearly implies a lower future tax burden than $100 billion a year forever, and therefore implies a fall in consumer spending of less than $100 billion per year. So the spending program IS expansionary in this case, EVEN IF you have full Ricardian equivalence.

Is that explanation clear enough to get through? Is there anybody out there?

It won't work, Paul:

Robert Lucas: would a fiscal stimulus somehow get us out of this bind...? I just don't see this at all. If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that's just a monetary policy. We don't need the bridge to do that... the only part of the stimulus package that's stimulating is the monetary part.... But if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder -- the guys who work on the bridge -- then it's just a wash.... [T]here's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that...

Now Paul, will you also disabuse them of the blithe implicit assumption that the interest elasticity of money demand is 0 when we think--given that exchanging cash for a Treasury bill right now is exchanging one zero-yielding government asset for another--that this is a time when, in Milton Friedman's words, the right number for the approximate elasticity of money demand is -∞?

Kick-Starting Employment

I appear to be one of the few people who thinks that the Geithner PPIP program is actually going to make money for the government--or perhaps I should say either make a lot of money or we will have much more serious things to worry about:

Project Syndicate: DewLong: Unemployment is currently rising like a rocket, because businesses that normally would be expanding and hiring are not, and those businesses that would normally be contracting and shedding workers are doing so very rapidly. Businesses that ought to be expanding and hiring cannot, because the depressed general level of financial asset prices prevents them from borrowing money or selling bonds on profitable terms.

In response, central banks should purchase government bonds for cash in as large a quantity as needed to push their prices up as high as possible. Expensive government bonds will shift demand to mortgage or corporate bonds, pushing up their prices.

Even after central banks have pushed government bond prices as high as they can go, they should keep buying government bonds for cash, in the hope that people whose pockets are full of cash will spend more of it, and that this will directly pull people out of joblessness and into employment.

In addition, governments need to run extra-large deficits. Spending – whether by the United States government during World War II, following the Reagan tax cuts of 1981, by Silicon Valley during the late 1990’s, or by home buyers in America’s south and on its coasts in the 2000’s – boosts employment and reduces unemployment. And government spending is as good as anybody else’s.

Finally, governments should undertake additional measures to boost financial asset prices, and so make it easier for those firms that ought to be expanding and hiring to obtain finance on terms that allow them to expand and hire.

It is this point that brings us to US Treasury Secretary Timothy Geithner’s plan to take about $465 billion of government money, combine it with $35 billion of private-sector money, and use it to buy up risky financial assets. The US Treasury is asking the private sector to put $35 billion into this $500 billion fund so that the fund managers all have some “skin in the game,” and thus do not take excessive risks with the taxpayers’ money.

Private-sector investors ought to be more than willing to kick in that $35 billion, for they stand to make a fortune when financial asset prices close some of the gap between their current and normal values. If the fund does well over the next five years – returns profits of 9% per year –private investors get a market rate of return on their very risky equity investment and the equivalent of an “annual management fee” equal to 2% of assets under management.

If the portfolio does less well – profits of 4% per year – the managers still get a healthy but sub-market return of 10% per year on their equity. And if the portfolio does badly – loses 1% per year – they lose roughly 70% of their investment. Those are attractive odds. Time alone will tell whether the financiers who invest in and run this program make a fortune. But if they do, they will make the US government an even bigger fortune. And 2% of assets under management is an annual fee that many sophisticated investors have been willing to pay private hedge funds – topped off with an extra fee of 20% of annual profits, which the Treasury is not paying.

The fact that the Geithner Plan is likely to be profitable for the US government is, however, a sideshow. The aim is to reduce unemployment. The appearance of an extra $500 billion in demand for risky assets will reduce the quantity of risky assets that other private investors will have to hold. And the sudden appearance of between five and ten different government-sponsored funds that make public bids for assets will convey information to the markets about what models other people are using to try to value assets in this environment.

This sharing of information will reduce risk – somewhat. When assets are seen as less risky, their prices rise. And when there are fewer assets to be held, their prices rise, too. With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms.

The problem is that the Geithner Plan appears to me to be too small – between one-eight and one-half of what it needs to be. Even though the US government is doing other things as well –fiscal stimulus, quantitative easing, and other uses of bailout funds – it is not doing everything it should.

My guess is that the reason that the US government is not doing all it should can be stated in three words: Senator George Voinovich, who is the 60th vote in the Senate – the vote needed to close off debate and enact a bill. To do anything that requires legislative action, the Obama administration needs Voinovich and the 59 other senators who are more inclined to support it. The administration’s tacticians appear to think that they are not on board – especially after the recent AIG bonus scandal – whereas the Geithner Plan relies on authority that the administration already has. Doing more would require a legislative coalition that is not there yet.

Union Strength, Unemployment, and the Great Depression

UCLA economist Lee Ohanian writes, in "What - or Who - Started the Great Depression?":

The defining characteristic of the Great Depression is a substantial and chronic excess supply of labor, with employment well below normal, and real wages in key industrial sectors well above normal.... President Hoover... offered industrial firms protection from unions in return for paying high wages. Firms deeply feared unions... [and] a sea change in economic policy, including policies advanced and supported by Hoover, that significantly fostered unionization and enhanced their bargaining power.... [T]he Depression is the consequence of government programs and policies, including those of Hoover, that increased labor’s ability to raise wages above their competitive levels. The Depression would have been much less severe in the absence of Hoover’s program.... Presidents Hoover and Roosevelt shared similar goals of fostering industrial collusion and increasing real wages and raising labor’s bargaining power. Hoover accomplished these goals... by inducing industry to maintain nominal wages, and by promoting and signing legislation that facilitated union organization and that increased wages above competitive levels, including the Davis-Bacon Act and the Norris-Lagaurdia Act. Roosevelt accomplished these goals with... the Wagner Act.... The 1930s would have been a better economic decade had government policy promoted competition in product and labor markets...

There are three problems with ascribing a big role to this.

The first is that Herbert Hoover's interventions in the labor market were absolutely tiny. If Hoover's signing of Norris-Laguardia and Davis-Bacon plus his meetings in the White House with business leades were enough to drive unemployment up from 2% to 25%, then Roosevelt's Wagner Act should have driven unemployment from 15% to 75%, and in western Europe--well, in western Europe we should see unemployment rates of 357%. The outcome is radically disproportional to the shocik that Ohanian claims drove it.

The second is that Ohanian's real wage is the inverse of a Blanchard-Kiyotaki markup, which is a consequences of low aggregate demand and high unemployment and not a cause. If you are a monopolistic competition-style New Keynesian, then you look at Ohanian and Cole and say "so"? This pattern is what you would expect to see whether or not union power or deficient aggregate demand is creating high unemployment.

The third, of course, is that Ohanian's measure of whether wages are above market levels is unconnected with the structural factors that he claims drove wages above market levels. Union power in the American economy reached its apogee in the 1950s, when union density reached 35% of non-farm employees and companies were the most frightened and prone to raise to keep unions out. The correlation between union density and unemployment that Ohanian's theory says should be very strong is simply not visible when one looks across decades: it is an hypothesis not borne out by empirical evidence.

As James Galbraith likes to say. Ohanian and Cole believe that high wages "relative to market clearing levels" caused the high unemployment of the 1930s both under FDR and under Hoover, but not not do so under Eisenhower. How do they know this? Because, they say, the labor market cleared--unemployment was low--in the 1950s but not in the 1930s, therefore the strong unions of the 1950s were weak and unable to exert market power while the weak unions of the 1930s were strong and able to choke off labor market competition. This argument seems to be not just a little bit circular.

Price Fishback on Labor Policy in the Great Depression

Price Fishback talks sense about labor policy in the Great Depression:

The Role of Labor Policy - Council on Foreign Relations: PRICE V. FISHBACK:  Sure.  So what I've been doing over the last 10 years of my life is collecting all sorts of statistics about what's going on in all sorts of different parts of the country because the experience of the Great Depression varies quite a bit from different parts of the country.  The amount that they spend varies quite a bit in various parts of the country as well.  So we've been trying to use this variation to try to get a sense of how effective these New Deal policies were.... [T]he way that they dealt with unemployment during this period with 25 percent unemployment was to come up with work relief expenditures. And so what they did was they put people back to work, first under the Federal Emergency Relief Act, and that was from 1933 to '35, done under the WTA. And the typical way they did that was that they paid you about half of the normal hourly wage... 50 cents, somewhere in that neighborhood, and they didn't have you working full time... almost like unemployment insurance.

So what's the effect of this?... [I]t doesn't look like that they had any effect on private employment at all... just... government employment increased.... [W]e found... that... you get quite different effects in different time periods during the New Deal.... [U]p to about half way through 1935... for every eight jobs you create in the public sector with the work relief, you get an additional job in private work because you're stimulating demand and things like this.... [I]n the second half of the decade... when you increase the government jobs or increase work relief by one job, you might lose as much as .3 or .5 private jobs....

Now, there were positive effects from the work relief bill as well.  It turns out that in the course of the decade, say you spend $1 on work relief... retail sales in that small town might go up about 50 cents... very positive effects on things like infant mortality... for about every $2 million you spend in modern dollars... they've saved an infant's life... reduced deaths from diarrhea... from infectious disease, and some suicides as well...

And Eugene White talks sense as well:

QUESTIONER: Eugene White, Rutgers University. And one of the ideas I heard floated was that labor market problems cause financial crises. So I thought I'd take an opportunity to throw some cold water on that idea.... For that actually to be true... [t]here can't be any bubbles. If there was a bubble in 1929, and there's... strong evidence that it's the case, then you get an independent shock coming from the decline in values both on consumption and investment spending.... [Again] for labor markets to cause financial crises, what you have to have happen is that higher wages would have to cause... defaults on industrial loans. Well, that's not the source of bank failures in the early 1930s...

Time to Use the D-Word

Barry Eichengreen and Kevin O'Rourke argue that it is time to use the D-word:

The world economy is tracking or doing worse than during the Great Depression: To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline... in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.... [M]onetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29.... Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline....

To summarize: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

What Do We Learn from the Prevalence of "Beat Sweeteners"?

Duncan Black on the journalistic "Trust Us, We Know What We're Doing" mantra:

Eschaton: I think the main issue with beat sweeteners is that they're part of a whole host of journalistic practices which aren't especially pretty... and more than that, they're practices that the public is largely ignorant of. There's a lack of transparency in journalism which is often at odds with the great degree of self-righteousness regularly exhibited by some in the profession.

You can't simultaenously be a superhuman devotee to truth telling and someone who writes stories deliberately to curry favor with sources. Such practices might at times be, on balance, good for the overall goal of providing information for readers (though frequently they're probably just good for the overall goal of personal career elevation), but they're also a reminder that journalism as practiced is not the pristine objective truth machine that some suggest when writing columns about how bloggers s---...

For the First Time in a Decade, an Administration Is Not Making Our Long Run Fiscal Problems Worse

This is, I think, something that makes us real deficit hawks happy--that we are, for the first time since the inauguration of George W. Bush, bending the curve and taking steps that help with our long-run deficit rather than steps that hurt.

Yet it does seem kind of quiet out there. Makes me think there are a lot of fake deficit hawks out there--people whose principal objection is not to unsustainable fiscal policies but rather to expenditures or tax expenditures that benefit the non-rich.


Congressional Budgets Pass Early Tests on Deficits and Economy, but Questions Remain: On the whole, the budget plans that the House and Senate approved yesterday pass the twin tests of: (1) beginning to address long-term deficits, or at least not making these deficits worse; and (2) not undermining the fiscal stimulus Congress recently passed....

Test #1: How would the budget plans affect the nation’s long-term fiscal problem? The budgets would somewhat reduce projected deficits. Some critics have charged that the House and Senate budgets would double or triple the national debt, while some supporters have said the budgets would cut the deficit by more than half. Both claims are problematic, for essentially the same reason: both mistakenly assume that the new policies proposed in the budgets are responsible for all of the changes in deficits and debt that would occur during the five-year period the budgets cover. In reality, the debt will grow in coming years primarily because of the large deficits that the Obama Administration inherited and the impact of the recession and financial crisis, while deficits will decline after the next year or so primarily because the economy is expected to recover. The best way to understand a budget’s impact on the deficit and the debt is to compare it to what deficits and the debt would be if we continued current policies. By that measure, the President’s budget would reduce deficits by $269 billion over the next five years and about $900 billion over the next ten years.[ii] The House and Senate budgets would reduce deficits by modestly larger amounts than the President’s budget over the next five years, provided that Congress strictly adhered to them.... Many of the same Senators and House members who launched the sharpest verbal attacks this week on the President’s budget or the congressional budget plans — on the ground that the deficits and debt projected under those plans are much too high — then opposed a number of the tough choices the President’s budget makes to start reducing deficits.... Many of these same Senators also pushed — in some cases successfully — proposals that would significantly worsen deficits, unless their costs were offset. And many of these Senators have a track record of insisting that the tax cuts they promoted in this week’s budget debate not be offset. Of particular note, the Senate narrowly went on record in favor of a large additional cut in the estate tax....

Test #2: Do the budget plans protect the economy in the near term? As funds from the recent economic recovery package begin to enter the economy and boost overall demand, it is important that policymakers not undercut that legislation by instituting funding reductions that reduce the demand for goods and services while the economy is still weak. The President’s budget calls for a 3.9 percent increase in total funding for domestic discretionary programs in fiscal year 2010, after accounting for inflation and several unavoidable cost increases for 2010 that are not related to any program expansion, such as the cost of conducting the next census.... Both chambers rejected efforts for significant cuts in domestic discretionary spending for the coming year, which would have weakened overall demand at a time when the economy almost certainly will still badly need a boost...

An Open Letter to Patricia Cohen of the New York Times (with Replies and Updates)

ORIGINAL 5:15 AM April 4:

Dear Ms. Cohen:

Eric Alterman speaks very highly of you indeed. And right now I am trying to resolve a certain... cognitive dissonance. The reports I got of the Council on Foreign Relations's conference last week on the Great Depression portrayed a day that was--frankly--insane.

We had Edward Prescott ranting about how the Depression came about because Herbert Hoover was not free market enough; denouncing "Hoover's anti-market, anti-globalization, anti-immigration, pro-cartelization policies"; and claiming that the economy only "started recovering in 1939, when... Roosevelt... called up the businessmen who had fled to England... and said please come back." I have never heard of a single one of the "businessmen who had fled to England" in the aftermath of Roosevelt's election, stayed there until 1939, and was then called back by Roosevelt.

And unemployment did fall from 23% in 1932 to 11% in 1939.

We had Ellen McGrattan misrepresenting my friend Christina Romer and claiming that because she is "using estimates of spending multipliers of about 1.5," she believes pure socialism in which we "have the government basically do everything." But Christy Romer says that she believes that the fiscal policy multiplier is 1.5 (or larger) now when unemployment is high--and thus that the government should do more right now--but that the multiplier drops to a very small value whenever unemployment is low.

We had Amity Shlaes claiming that "unemployment remained high throughout the decade" of the 1930s--in spite of its fall from 23% to 11%--because "the uncertainty created by Roosevelt’s continual tinkering paralyzed private investors"--in spite of the rise in inflation-adjusted private investment spending from $11 billion in 1932 to $77 billion in 1939.

Yet you seem to write of a quite different conference. I would have thought that Prescott's denunciation of Hoover, McGrattan's claim that the Obama administration seeks socialism (and their denials), and the striking disjunction between Shlaes's claims of little progress in unemployment and falling private investment in the 1930s and the reports of the Bureau of Labor Statistics and the Bureau of Economic Analysis would be... somewhat newsworthy.

Can you shed some light on the difference between the CFR conference as related by, say, James Galbraith and the conference that you attended?

Revisionist Views at a Conference on the Depression and the New Deal: For more than half a century, America’s political leaders — Republican and Democrat — have sought to wrap themselves in the legacy of Franklin Delano Roosevelt, the man credited with replacing fear with hope and ending the Great Depression. But in recent years some writers and economists have been telling a version of this story that is quite different from the one generally taught in school or seen on the History Channel. In this interpretation Roosevelt is a well-meaning but misguided dupe who not only prolonged the Depression but also exacerbated it. For many people, it’s like hearing that Little Red Riding Hood’s grandmother and not the wolf is the rapacious killer.

Since the financial crash this fall, the revisionist look at the Great Depression has attracted new attention; it even recently made its way onto Stephen Colbert’s television show. But more than that, it has become an intellectual banner for Republican opponents of the Obama administration’s ambitious bailout and stimulus proposals. Amity Shlaes, a syndicated columnist who works at the Council on Foreign Relations, helped ignite this latest revisionist spurt with her 2007 book, “The Forgotten Man: A New History of the Great Depression.” “The deepest problem was the intervention, the lack of faith in the marketplace,” she wrote, lumping Herbert Hoover and Roosevelt together as overzealous government meddlers. The current financial crisis, as well as continuing praise from conservatives, helped propel the book back onto the Times best-seller list in November. Jonathan Alter, an editor at Newsweek and the author of “The Defining Moment: FDR’s Hundred Days and the Triumph of Hope” — which has also benefited from the renewed fascination with the 1930s — calls Ms. Shlaes’s book a “taste badge,” flaunted by Republicans looking for a way to oppose the administration.

This week competing theories about the Depression and the New Deal were once again on display at a conference at the Council on Foreign Relations’ New York headquarters, co-hosted by the Leonard N. Stern School of Business at New York University, and partly organized by Ms. Shlaes. She and other critics of the New Deal credit Roosevelt with some important innovations, like restoring confidence in banks and establishing social insurance. Nonetheless, they argue that most of his mucking about in the economy crowded out private investment and antagonized the business world, and thus delayed recovery. Unemployment remained high throughout the decade until World War II, Ms. Shlaes told conference attendees, because the uncertainty created by Roosevelt’s continual tinkering paralyzed private investors. When the federal government keeps changing the rules, it’s like having Darth Vader in control, John H. Cochrane, a professor of finance at the University of Chicago Booth School of Business, said during a panel. “I have changed the deal,” he intoned like Vader, the “Star Wars” villain. “Pray I don’t change it any further.”

Many of the economists who were invited to speak were similarly skeptical of the New Deal, even if they disagreed on the Depression’s causes. “No episode in American history has been so misinterpreted as the Great Depression,” declared Richard K. Vedder, an economist at Ohio University. By artificially keeping prices and wages high, he argued, both Hoover and Roosevelt prevented the economy from adjusting, which is why unemployment remained in double digits until the United States entered the war. Anna Schwartz, who collaborated with Milton Friedman on a classic study of the Depression, and the Nobel Prize winner Robert E. Lucas Jr. argued that the idea of stimulating the economy with federal spending is a fairy tale. Government spending just crowds out private investment, they asserted; the money supply is the only thing that matters...

Sincerely yours,

J. Bradford DeLong

UPDATE 6:45 PM April 5: Patricia Cohen replies, and upgrades opinions-on-shape-of-earth-differ journalism to a moral imperative: "It would be completely inappropriate for me to declare one theory correct or incorrect, however, and had I inserted that into the piece, an editor would -- or certainly should -- take it out..."

Patricia Cohen replies:

Thanks for your note about my article. Let me give you a bit of a longwinded reply. Part of my beat is to cover what kind of intellectual currents are making their way through the scholarly world as well as the popular culture, regardless of whether I agree with them or not. I think it is particularly important to cover ideas that are often unpopular or have been dismissed by the mainstream yet are taken seriously by respected scholars or those that are making headway among large swaths of the public despite expert opinion. In 2007, for example, I wrote a story about how heterodox economists (like Jamie Galbraith) complained that they were being marginalized by neo-classical economists who dominated economic departments.

As I say in my first paragraph, FDR has been an idol to generations of Americans. The notion that he helped get the U.S. out of the Depression is taught is pretty much taught in public schools and secondary school textbooks across the country; Reagan continually invoked Roosevelt, recognizing his widespread appeal, etc. etc. So when an idea that has been on the fringe for decades -- that FDR actually made the Depression worse -- starts to make its way into the mainstream, that to me is newsworthy. The fact that the overwhelming weight of opinion continues to think it crazy, and yet it keeps making headway in unlikely places makes it all the more newsworthy. Whether or not one thinks Amity Shlaes' book belongs in the library or in the trash, it has clearly been very influential. The recent crash is one reason, reviving interest in a book that had come out in 2007 and had somewhat faded from public view, but more importantly, because it has been championed for political reasons by Republican opponents of Obama's economic policy (something that is noted very prominently in my article and commented upon by Jonathan Alter). That influence is what prompted Jonathan Chait for example to write a critique of it, which then made its way onto the Colbert show.

Now, the Council of Foreign Relations decides to sponsor a conference on the subject along with New York University's Business School -- not the Heritage Foundation or the American Enterprise Institute -- but the very soul of the traditional establishment and a liberal Eastern academic institution. The majority of people invited to speak, mostly economists, share the view that Roosevelt made things worse (although often for different reasons). Regardless of what one thinks of Ms. Shlaes book and scholarship, many of the economists who agree with her main thesis, are highly respected and hold positions of power -- 2 Nobel prize winners, Robert Lucas and Edward Prescott; Anna Schwartz; Harold Cole, an economist at Univ of Pa. and an advisor to the Fed; Price Fishback, etc. etc. There are knowledgeable people like yourself who may think what they say are rubbish, but I don't think you can argue that none of them deserve any coverage in the New York Times.

I give both sides the opportunity to state their main arguments, but because I am a news reporter and not an opinion writer, I don't take sides. I'm sure Mr. Galbraith articulated his view of the conference very effectively; Robert Rubin would have given a very different opinion on the parts of the conference he saw, as would Anna Schwartz. It would be completely inappropriate for me to declare one theory correct or incorrect, however, and had I inserted that into the piece, an editor would -- or certainly should -- take it out. What I can and should do is give the reader sufficient context -- for example, that most people still consider the idea that FDR made things worse preposterous; that the theory is being used partly for political purposes; that the pro-FDR people felt the panels were one-sided; that opinions about the Depression have become a kind of a litmus test for where people stand on Obama's economic policies.

There are scores of topics and relevant points that I could have discussed in a news story, but in 1,100 words, I clearly can't cover the waterfront. I did not, for instance, make any mention of the first panel on the causes of the Depression at which Edward Prescott spoke -- someone whom you mention in your post. (Even among conservatives, there is significant disagreement on that point.) Nor did I get into the fairly extended discussion of the fiscal multiplier effect, a topic that is interesting and important, but fairly technical and much more appropriate for the business pages than for the culture section, for which I write.

For interested readers, though, we link on the Internet to the entire CFR conference, so they can judge for themselves. In any event, I hope that answers your question to some extent.


Patti Cohen

UPDATE 2 8:15 PM April 5: Linda Hirshman is displeased by Patti Cohen's claim thqt "because I am a news reporter and not an opinion writer, I don't take sides." She emails:

[T]his “but because I am a news reporter and not an opinion writer, I don't take sides” is pretty outrageous. When Patricia Cohen disagreed with [me]... she attacked me in the first person, broadside, her opinion, no research, no fair and balanced, not even in the FOX sense of the phrase....

That Ms. Hirshman's views on family life now sound so radical is a testament to how roundly the mainstream has rejected them. While rigid doctrines may have made sense in the early days, they don't now, when major goals have been won and a more diverse group of women are in the picture. Indeed, the common critique of the women's movement in the 60's and 70's was that it was too elitist and dogmatic, that it didn't respect women who wanted to stay home...


That is why edicts that order women either to get out of the house or to stay there inevitably resurface. Issuing marching orders is simple. "Viva la revolución!" is a lot catchier than "Muddle Through!" It's just not helpful...

I may be wrong (although of course I don’t think so).... But regardless of whether Linda Hirshman is wrong or right or crazy, Patricia Cohen is the furthest thing from a "news reporter and not an opinion writer"...

UPDATE 3: 8:04 AM April 6: Patricia Cohen's email of last night--quoted in full above--contained no request for confidentiality (which I was always taught had to be negotiated in advance). Nevertheless, this morning she writes:

That email was a response to the email you sent me, and I did not realize you were going to ignore my request not to post it on your website.

For the sake of clarity, could you please note in response to Linda Hirshman's post that the article regarding her work ran in the Week in Review, which runs analysis and opinion, and not in the daily news report.

I posted her email because (a) it was a response--which one rarely gets: the New York Times's SOP is "we have the megaphone and you do not"--(b) it was an intelligent and well-written response, and (c) it lays out a point of view--the opinions-of-shape-of-earth-differ journalism response that "yes, I know these people I am covering are very strange, but it would be unethical to do more than quietly hint to my readers what I in fact believe to be the case"--that I think is completely wrong but am always anxious to learn more about.

Thus when Cohen writes:

[B]ecause I am a news reporter and not an opinion writer, I don't take sides.... It would be completely inappropriate for me to declare one theory correct or incorrect...

She immediately follows it with:

What I can and should do is give the reader sufficient context -- for example, that most people still consider the idea that FDR made things worse preposterous; that the theory is being used partly for political purposes; that the pro-FDR people felt the panels were one-sided; that opinions about the Depression have become a kind of a litmus test for where people stand on Obama's economic policies...

Which I can read in no way other than: I have to appear to be impartial, but actually my thumb is on the scale--and on your side.

An Appeal for Help: Recent History of Economic Thought

Somewhere, somehow, without as far as I know leaving any paper trail, Chicago-School economists became convinced of two false things:

  1. Ricardian equivalence means not just that deficit-financed tax cuts have no short-term stimulative effects but also that deficit-financed spending increases have no short-term stimulative effects on nominal spending.

  2. There are no issues worth discussing at the zero nominal interest rate bound: monetary expansion via open market operations retains its full potency and power to affect the level of nominal spending spending even when open market operations are just the swap of one zero-yielding government liability for another.

If anyone can help me understand the process by which these strange doctrines of economics became Holy Writ among the Monsters of the Midway, I would be very grateful...

The latest to show up in these camps is Robert Lucas:

Why a Second Look Matters: [1929-1932] added up to four years of negative [nominal income] growth averaging minus-8 percent a year.... [T]he Federal Reserve didn't cause this decline.... My guess is it was... people seeking safety in liquidity after the stock market crash... people... wanted to build up their cash holdings. [T]he Fed could have responded to that situation by... creating... reserves... to supply the added liquidity.... But the Fed didn't do anything to relieve this liquidity. They... cut interest rates to zero. They were, I guess, the believers that the only thing... monetary policy can do is fix interest rates. And once interest rates get to zero, you're over.

Friedman and Schwartz... [argued] that this passive response by the Fed must bear the ultimate responsibility for the severity of the contraction.... So even today, many people think of the Depression as evidence that monetary stimulus is ineffective when the real problem was that it wasn't used....

[T]his is one policy mistake that's not going to be repeated in the current situation.  The Fed, under Bernanke's leadership, had added something -- I never know quite know what number to say, I'll say 600 billion (dollars) in bank reserves... [to] a system that operated with $50 billion in reserves last August... just a mountain of new reserves.... I think this is the right thing to do.... It is not possible to pull a modern economy through a neutral or painless deflation.  Economic theory doesn't really tell us why -- what's hard about it.  But, the evidence, I mean, it just doesn't work....

[W]ould a fiscal stimulus somehow get us out of this bind, or add another weapon that would help in this problem? I've already said I think what the Fed is now doing is going to be enough to get a reasonably quick recovery committed. But,could we do even better with fiscal stimulus? I just don't see this at all. If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that's just a monetary policy. We don't need the bridge to do that. We can print up the same amount of money and buy anything with it....

But if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder... then it's just a wash.... [T]here's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge... taxing them later isn't going to help, we know that...

Ezra Klein; The Weathervane that Is Evan Bayh

Ezra Klein writes:

Ben Nelson genuinely is a conservative Democrat. The Poole-Rosenthal rankings -- which most consider the leading measure of a congressman's relative ideology -- have, for years, ranked Nelson as the most conservative Democrats in the Senate. Call him Democrat #1. Evan Bayh, however, has not traditionally been number two. I went back in the rankings through the 107th Congress -- which began in 2001 -- to compare Bayh and Nelson's ideological consistency. The numbers on the Y axis represent how conservative of a Democrat each senator was. So #1 would be the most conservative Senate Democrat and #5 the fifth most conservative Senate Democrat and so on. The blue line is Bayh. The red line is Nelson.


To say Bayh lacks Nelson's steady hand on the wheel is a bit of an understatement. The two really interesting data points, however, are the 109th Congress, which stretched from 2005 to 2007, and the 110th Congress, which ended in January of this year. In the 109th Congress, Bayh's voting pattern suddenly develops an uncharacteristic liberalism. He becomes the 19th most conservative member, with a record more liberal than, among others, Joe Biden. As context, these were also the years when Bayh was preparing for the presidential run that he eventually aborted.

In the 110th Congress, however, that flash of liberalism gives way to a career-high conservatism: He actually displaces Nelson as the Caucus's most conservative member. He's running for reelection in Indiana this year, but this is also the year that Indiana's tectonic plates shift and the state chooses that Obama guy. So I'm not going to pretend that I fully understand the motivations behind the sharp swings in Bayh's voting record. But they're undeniably present...

I cannot help but think that true moderates should choose a much better leader--that they don't want to follow the lead of and give media footprint to a weathervane.

Posted via web from at Brad DeLong's Scrapbook

Justin Fox: Now Job Losses Are a LOT Worse than 1981-1982

Justin writes:

Here, updated with this morning's non-farm payroll data from the Bureau of Labor Statistics, is the latest edition of my comparing-the-recessions chart:


And we have "several months" of employment free fall still to come.

Posted via web from at Brad DeLong's Scrapbook

Yet More New Deal Revisionism Blogging...

A correspondent writes:

The problem with the NYT story is that it reports a "controversy" which is not in any serious sense an intellectual controversy, as opposed to agitprop theater, and amateur agitprop at that. Shlaes's book is engaging in some respects -- a character defense of Samuel Insull! -- but contains no economic analysis to speak of. Nor did her comments at the CFR session. And she's prone to flagrant error. For instance on page 7 of her book she states that industrial production did not increase in the US after 1932. In fact, from 1932 to 1936, it doubled...

I think well of [Patricia] Cohen's work generally, but it would be reasonable to go beyond the "she said, he said" reporting, to ask whether the claims being made have any actual merit. In the final session, which Cohen apparently attended, [Galbraith] pointed out very clearly that by presenting an average value for unemployment in the 1930s Shlaes was grossly misstating the actual history and reality, which is that unemployment peaked in early 1933 and fell sharply and steadily in the first four years of the New Deal. But Cohen didn't pick up on it...

Richard Haass was warned that the program that Sebastian Mallaby and Amity Shlaes had put together should have been cancelled--that it would not educate the public and that it would cost the Council on Foreign Relations substantially in terms of its reputation as an honest broker. Haass seems to have thought that he could rescue the event by parachuting Michael Bordo, Richard Sylla, Peter Temin, and James Galbraith in at the last minute to add economists both with expertise and free of wingnuttery to the event. They acquitted themselves well, as did Price Fishback. (Robert Lucas was interesting... but in the end disappointing, as he ignored all of the issues that come up when one attempts monetary expansion when safe interest rates are at the zero nominal bound.)

Howard comments:

An Open Letter to Patricia Cohen of the New York Times: one of the many problems with contemporary journalism is that it is taught as a craft and presumed to be transferable to any subject. The odds, in short, that patricia cohen has the background to understand what she was hearing are very slim, but a a new york times reporter, she believes that she is capable of grasping and presenting anything in a matter of days. We see this kind of abysmal lack of background at work over and over again in our media discourse...

This from Stephen Seidman is worth promoting:

I'd like to second the preceding comment. You don't see chemists these days making claims for the validity of the phlogiston theory, physicists (at least since the "German Physics" of the Nazi era) trying to discredit relativity and quantum theory, or biologists (since Lysenko) reviving Lamarck. Is economics anything more than a collection of conflicting models and theories, with each under constant attack from the proponents of the others? Is there a generally accepted set of core principles that define the subject? If so, are the arguments just about the correct application of these principles, or is it that some economists are choosing a model to produce a desired answer?

It's actually worse than that. It's not as though Prescott, Shlaes, and McGrattan are promoting the phlogiston theory. It is that they claim to have lit charcoal in fire in the presence of oxygen and produced not water, carbon dioxide, and heat but rather cold and little spheres of silver.

And this, from an anonymous lurker:

Patti Cohen's "beat" is enormous. Anything at a university, foundation, or think tank that might be noteworthy becomes her default responsibility. Stuff that goes on in academia would be part of many reporters' beats rather than cordoned off to just one. The web is going to make this situation better, including Patti Cohen's life -- though she will be paid much less. A list of her assignments is

Number 1 Ladies Detective Agency Blogging

John Jurgenson:

HBO Tries No Sex, New City - HBO, the cable network known for anguished mobsters and sexy Manhattanites, is about to introduce an unlikely new character: a cheery private eye named Precious who operates out of Africa. She's the star of "The No. 1 Ladies' Detective Agency," premiering March 29. Aimed at a family audience, it's HBO's only series airing at 8 p.m., and is part of the network's efforts to overhaul its post-"Sopranos" identity. Key to HBO's bet on "No. 1 Ladies" was its lead actress, R&B singer Jill Scott, and the group of Hollywood veterans who steered the project, including producer Harvey Weinstein and filmmakers Anthony Minghella and Sydney Pollack. Messrs. Minghella and Pollack died last year, shortly after the show's two-hour pilot was shot.

. Weinstein says the series's portrait of African life is unusual. "[It] has nothing to do with AIDS or pestilence or problems," he says. "Of everything I've ever done in this industry, nothing makes me prouder than this television show, of all things." In other TV crime procedurals, investigators use forensic evidence, mental tricks or muscle to collar bad guys. Precious relies on intuition, and often sits quietly sipping tea as she puzzles over philandering husbands and missing children in Botswana. In one episode, Precious juggles the cases of a lost dog, a "definitely disturbed dentist" and a deacon who vanishes during a river baptism. Ms. Scott says, "If I put myself in the viewer's place it would take me a moment to calm down" and adjust to the show's pace...

Nancy Smith:

TV Review: 'The No. 1 Ladies' Detective Agency' - Much has been made of the fact that HBO's new series "The No. 1 Ladies' Detective Agency" (Sundays, 8 to 10 p.m. EDT this week and from 8 to 9 thereafter) is not like the sexy, edgy programming that made the network famous. Private investigator Precious Ramotswe (Jill Scott) and her friends don't use four-letter words or sleep around, and there are no exploding heads or other body parts gushing blood. The world Precious inhabits is so quaintly graceful that women still want to wear dresses. In the first five hours of the series, in fact, there's hardly a betrousered female to be found. It will be interesting indeed to see whether all of the network's core viewers can reprogram minds accustomed to gut-churning roller coasters and instead enjoy a teacup ride.

More interesting still is the setting, which is the African nation of Botswana. Not the "Out of Africa" sort of Africa, as seen by whites, with the proverbial colorful cast of thousands in the background. "The No. 1 Ladies' Detective Agency" revolves around the everyday lives of black Africans. Undoubtedly, they are some of the luckier ones. As the former British protectorate of Bechuanaland, tucked between South Africa and Namibia, Botswana was a backwater in the best sense of the word. It made a smooth transition to democracy and even today retains a measure of old civilities that have been all but abandoned in the West. Many customs reflect a British connection -- boys named Wellington, English still ripe with words like "rascals," and a familiarity with Miss Marple. Yet the citizens of Botswana, perhaps because they never felt relegated to the second-class status of a colonized people, seem to have escaped the usual post-independence scourges of dependency, corruption and chaos.

So it is that as the series opens, we hear Precious narrate the story of her upbringing by a beloved father who taught her to be brave and independent, and then willed her 180 head of cattle and a white Datsun (or atsun once the D fell off) van. With that legacy, she opens shop as the country's first female detective. "I love my country, Botswana," she says, and one way to show affection is to help people solve their problems.

Each episode finds Precious, along with a growing list of eccentric friends and clients, embroiled in several mysteries. Many -- a philandering husband, a lost dog, an insurance scam, medical fraud -- are the stuff of life anywhere. This being Africa, there are occasional clues one wouldn't find in New York -- the kind involving, say, a man-eating crocodile. Alongside enthusiastic and fantastically costumed Christian worship, witchcraft factors into some plots, as well, although when evil guys show up, they act exactly like gangsters the world over...

Calculated Risk on Underemployment

The Risk writes:

Calculated Risk: Part Time for Economic Reasons Hits 9 Million: Not only has the unemployment rate risen sharply to 8.5%, but the number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is now at a record 9.0 million. Of course the U.S. population is significantly larger today (about 305 million) than in the early '80s (about 228 million) when the number of part time workers almost reached 7 million. That is the equivalent of about 9.3 million today, so population adjusted this isn't quite a record - yet - but it is getting close. And the rapid increase is stunning ...

Menzie Chinn Bears Bad News

He writes:

Econbrowser: GDP Snapshot: First Read on 2009Q1: Just a quick post to highlight the OECD's recent forecast [0] for the US (-7.2% SAAR decline in 2009Q1), and e-forecasting's latest take (6.8% SAAR decline in 2009M03). Note that forecasted GDP... is above the level implied by e-forecasting. E-forecasting's estimate is that GDP will be down by 9.9% (SAAR) in 2009Q1. If this more dire forecast proves accurate (Deutsche Bank predicts -8.0% SAAR), then -- as Brad Delong likes to say -- we'll need a bigger stimulus package...

Council on Foreign Relations Crashed-and-Burned Watch CXIII (Great Depression Revisionism Department)

The Council on Foreign Relations last Monday held a New Deal Conference--an event that, as one senior Bush I economic policy advisor and rock-ribbed Republican snarked, was the Council on Foreign Relations' attempt to outbid Heritage as the most biased thinktank.

Here is Edward Prescott. It is truly remarkable:

The 1920s: Bubble, Growth, or Gold? - Council on Foreign Relations: EDWARD C. PRESCOTT:  The period of the '20s was one of healthy growth, until Hoover's anti-market, anti-globalization, anti-immigration, pro-cartelization policies were instituted, brought this expansion to an end, and created a great depression. Roosevelt's policies prolonged the Depression for over six additional years.... Ellen McGrattan and I looked at the -- using some theory and saying, what should the value of the stock market be?  You look at the value of the productive assets, and this includes intangible capital, brand names, patents, know-how of corporations, as well as the explicit machines and factories and equipment.... We found that it's correctly evaluated. By the way, the stock market is volatile as can be.  But there's a strong regression to fundamentals....

[T]he economy only recovered and it started recovering in 1939, when there's a major shift in policies. That was the year when Roosevelt said the New Deal is dead. That was the year he called up the businessmen who had fled to England because -- and said please come back; we got to get ready for war. It was not expenditures. Government defense expenditures and net exports did not jump until 1941. ... A lot of people don't know the current administration has abandoned the use of cost-benefit analysis by rescinding the 1981 executive order requiring all regulations to be evaluated before being implemented...

It is hard to know what to say. The fall in unemployment from 23% in 1932 to 11% in 1939 is not "recovery" because the economy only "started recovering in 1939"? The post-1939 recovery--as unemployment falls from 11% in 1939 to 9.5% in 1940 to 6% in 1941 to 1.2% in 1944--is "not expenditures... expenditures... did not jump until 1941"? The claim "the current administration has abandoned the use of cost-benefit analysis" would astonish Cass Sunstein and Jeff Liebman, who are doing just it in OMB right now. And who were those "businessmen who had fled to England" and stayed there until 1939 in the aftermath of Roosevelt's election? Can Prescott name a single one? No.

This is not economics. This is fantasy pure and simple.

Council on Foreign Relations Crashed-and-Burned Watch CXII (Great Depression Revisionism Department)

The Council on Foreign Relations last Monday held a New Deal Conference--an event that, as one senior Bush I economic policy advisor and rock-ribbed Republican snarked, was the Council on Foreign Relations' attempt to outbid Heritage as the most biased thinktank.

Here is Ellen McGrattan, grossly misrepresenting the beliefs of CEA Chair Christina Romer:

ELLEN R. MCGRATTAN: [Obama's] current advisers are using estimates of spending multipliers of about 1.5.  So by that I mean you spend $1 on government spending and you get $1.50 in output.  So how do you do that math?  Well, you've got idle capital and idle labor, and the government being extremely efficient comes up with $1.50. Now, of course, if this were right, we'd have the government basically do everything...

Christie Romer certainly doesn't believe that if the fiscal policy multiplier is 1.5 now then "the government [should] basically do everything" in the economy. She believes that the fiscal policy multiplier is 1.5 (or larger) now when unemployment is high--and thus that the government should do more right now--but that the multiplier drops to a very small value when unemployment is low.

For McGrattan to claim that Romer believes that we should "have the government basically do everything"--well, the best you can say about McGrattan is that that demonstrates extraordinary incompetence on her part.

Another Reason Why Friends Don't Let Friends Read The Politico


TBogg » Strong Black Woman Found To Be Tolerable: Congratulations to Michelle Obama for rising above the fever swamps of wingnut fabricated outrage and to Politico's Ben Smith for treating those mostly imaginary negatives as facts:

The newest Gallup numbers show Michelle Obama as more popular even than her husband, with a 72% favorable rating to his 69%. Her transformation in the public eye is one of David Axelrod's great successes, and really a remarkable thing. She was, for a moment, a serious vulnerability for the campaign. She was the subject of her own set of hostile rumors, many centered on race: There was the imaginary "whitey tape" and the rumors about her (actually pretty dry) college thesis. She did herself damage with a comment about how her husband's success made her proud to be an American for the first time. Then she retreated into a far narrower space of supportive wife and mother.

The puke funnel lives...

The Geithner Plan: Little to Worry About

John Hempton gets it:

Bronte Capital: A little bit of careful thinking – and why Krugman’s despair is misplaced: it is simply illogical to believe that

  1. The banks are largely insolvent,

  2. The right or actual government policy is guarantee big banks (ie no more Lehmans) and

  3. The subsidy to the Geithner Funds is a real problem.

If both (1) and (2) applied the Geithner Fund MUST save the government money - so the subsidy is irrelevant. This illogic extends to several of the bloggers I admire most. That is why I think there is a good academic paper in there. Krugman actually expresses “despair” over the subsidy. His despair is misplaced...

As one White House official said (roughly): But the FDIC has already effectively made enormous non-recourse loans to the banks. How can shifting those from the banks to the Geithner Plan funds be a problem?

Maynard Keynes Might Say: JMK Comments on Christina Romer's Analysis of the Benefits of Quantitative Easing in the Great Depression

From RJW:

Robert's Stochastic thoughts: C Romer with lots of data in 1992 "What Ended the Great Depression?" The Journal of Economic History vol 52 pp 757-784:

This paper examines the role of aggregate demand stimulus in ending the Great Depression. Plausible estimates of the effects of fiscal and monetary changes indicate that nearly all the observed recovery of the U.S. economy priort to 1942 was due to monetary expansion. A huge gold inflow in the mid- and late 1930s swelled the money stock and stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. That monetary developments were crucial to the recovery implies that self-correction played very little role in the growth of real output between 1933 and 1942.

Now, I'm not sure if Obama understands that Romer is saying that the US recovered because of Hitler who scared the gold out of Europe (she is very clear on this point in the text). She makes a strong case, but the party line is that Roosevelt deserves the credit.

Keynes, with almost no data and writing in 1935 (hence before the flight), understood the issue. In The General Theory of Employment Interest and Money, Chapter 23: Notes on Notes on Merchantilism, the Usury Laws, Stamped Money and Theories of Under-consumption, Keynes argued that back in the bad old days, going for the gold was the only feasible approach.

Now, if the wage-unit is somewhat stable and not liable to spontaneous changes of significant magnitude (a condition which is almost always satisfied), if the state of liquidity-preference is somewhat stable, taken as an average of its short-period fluctuations, and if banking conventions are also stable, the rate of interest will tend to be governed by the quantity of the precious metals, measured in terms of the wage-unit, available to satisfy the community’s desire for liquidity.

At the same time, in an age in which substantial foreign loans and the outright ownership of wealth located abroad are scarcely practicable, increases and decreases in the quantity of the precious metals will largely depend on whether the balance of trade is favourable or unfavourable.

Thus, as it happens, a preoccupation on the part of the authorities with a favourable balance of trade served both purposes; and was, furthermore, the only available means of promoting them. At a time when the authorities had no direct control over the domestic rate of interest or the other inducements to home investment, measures to increase the favourable balance of trade were the only direct means at their disposal for increasing foreign investment; and, at the same time, the effect of a favourable balance of trade on the influx of the precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment.

That does not mean that Keynes was a merchantilist. In particular, one can imagine how delighted he was by a process that enriched the USA at the expense of Europe:

For this and other reasons the reader must not reach a premature conclusion as to the practical policy to which our argument leads up. There are strong presumptions of a general character against trade restrictions unless they can be justified on special grounds. The advantages of the international division of labour are real and substantial, even though the classical school greatly overstressed them. The fact that the advantage which our own country gains from a favourable balance is liable to involve an equal disadvantage to some other country (a point to which the mercantilists were fully alive) means not only that great moderation is necessary, so that a country secures for itself no larger a share of the stock of the precious metals than is fair and reasonable, but also that an immoderate policy may lead to a senseless international competition for a favourable balance which injures all alike.[4] And finally, a policy of trade restrictions is a treacherous instrument even for the attainment of its ostensible object, since private interest, administrative incompetence and the intrinsic difficulty of the task may divert it into producing results directly opposite to those intended.

Thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which I was brought up and which for many years I taught;— against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste of time. For we, the faculty of economists, prove to have been guilty of presumptuous error in treating as a puerile obsession what for centuries has been a prime object of practical statecraft...

Basically, Keynes' insight into the results reported by C. Romer is that, given the fools in the Fed and the timidity of Roosevelt, the US might as well have been an early modern country (and US policy was relatively Keynesian compared to say that of France).

Ezra Klein Approves of the IMF as Well

"IMF FTW," he writes:

EzraKlein Archive | The American Prospect: The final "communique" from the G-20 meeting has emerged. Most of it is the happy togetherness talk you'd expect to emerge from such a conference, but this bit is fairly real:

The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.

That's money that will largely go towards supporting the economies of developing countries.Which means that they are less likely to collapse. Which means that we're less likely to have to deal with nation-state chaos atop the turmoil in the markets. I also like Yglesias's point that this is a fair coup for liberal internationalism."More importantly," he says. "[this] will make sure that the IMF can continue to function as an important and valuable element of international governance. Getting this done would probably constitute more diplomatic work than the Bush administration managed to pull off in eight years."

Greg Ip Is Kinda Sorta Optimistic

He doesn't fear a Great Depression. But a five-year or a ten-year anemic recovery is still in his Visualization of the Cosmic All: What has brought this turnabout? In part, the normal corrective powers of the economy. Larry Summers, Barack Obama’s main economic adviser, has noted that current annualised vehicle sales of about 9m are well below the 14m necessary for replacement and rising population, while annualised housing starts are about a quarter of the rate needed to support the forming of new households. The improvement is also the expected response to monetary and fiscal stimulus, both of which have been exceptionally aggressive. The Federal Reserve, having lowered short-term interest rates in effect to zero, has intervened in bond markets to push down long-term mortgage rates as well. On April 1st paycheques were due to begin reflecting the tax cuts in Barack Obama’s $787 billion fiscal stimulus.

As investors have shifted their economic outlook from catastrophic to merely grim, the stockmarket has shot higher, by 19% on April 1st from its 12-year low on March 9th. Like houses, stocks look cheap. Strategists at Deutsche Bank estimate that investors can expect to earn an additional seven percentage points over the long run from holding stocks instead of Treasury bonds, the highest such “equity risk premium” in at least 25 years. Mr Summers says it may be “the sale of the century”.

Yet even if the bottom in economic activity is in sight, a robust recovery almost certainly is not. Housing usually leads the way out of recession as falling interest rates unleash pent-up demand. But easy credit in earlier years has turned many renters into homeowners already. At the end of last year 67.5% of households owned their home, down from a peak of 69% in 2006 but still well above the 64% that prevailed from 1965 to 1997. Moreover, many prospective buyers cannot take advantage of low mortgage rates because higher down-payments are now required. The tonic of lower interest rates has been dulled by the dysfunctional financial system. That is why credit markets have not reflected the optimism of stocks and are forcing corporations to pay punitive yields on the bonds they issue. Consumer spending may also be depressed for some years to come by the record 18% collapse in household net worth over the course of last year, a drop of $11 trillion. That is a chief reason why the OECD on March 31st released an exceptionally gloomy prognosis, predicting that the American economy would shrink by 4% this year and not grow at all next year. Deflation, it said, “may become a threat”...

Obama Succeeds at the G-20

We actually have some successful international policy coordination!

Paul Krugman:

An IFI success: Credit where credit (line) is due: the G20 outcome was better than I expected, with something substantive and important emerging — namely, much bigger funding for international financial institutions (IFIs), plus expanded trade credit. This will help smaller, currency-crisis countries a lot. A turning point? No. But realistically, most big-time international meetings produce nothing; this did something significant.

Jennifer Loven:

Obama's scorecard: Some setbacks but a good summit: Thursday's daylong gathering of the G-20 nations pledged $1.1 trillion in loans and guarantees to struggling countries, agreed to crack down on tax havens, large hedge funds and other risky financial products, rejected protectionism that hampers foreign trade and committed to upgrading an existing financial forum to flag problems early in the global financial system. Those were all elements Obama was seeking.... Overall, the outcome seemed more robust than the one global leaders were able to muster at a first summit held last fall....

Still, the leaders, many wary of piling up debt, did not sign off on large new stimulus packages for their own countries. Obama's administration had initially pushed for such a commitment.... "The steps that have been taken are critical to preventing us sliding into a depression," he said. "They are bolder and more rapid than any international response that we've seen to a financial crisis in memory."...

"I do not buy into the notion that America can't lead in the world," Obama said. "America is a critical actor and leader on the world stage and that we shouldn't be embarrassed about that. But ... we exercise our leadership best when we are listening"...

The IMF's willingness to turn its funds into resources that countries can count on is especially nice to see:

Flexible Credit Line (FCL). The IMF is introducing this new credit line for countries with very strong fundamentals, policies, and track records of policy implementation. Access to this credit line would be most useful for crisis prevention purposes—although use of this instrument for crisis resolution is also allowed. FCL arrangements would be approved on request to countries meeting pre-set qualification criteria. Access under the FCL would be determined on a case-by-case basis. Disbursements under the FCL would not phased or conditioned to policy understandings as done under a traditional Fund-supported program. This is justified by the very strong track records of countries that qualify to the FCL, which give confidence that their economic policies will remain strong and that corrective measures will be taken in the face of shocks.

The establishment of the FCL represents a significant shift in delivering Fund financial assistance, even relative to the Short-term Liquidity facility (SLF), which will therefore be discontinued. While the SLF was also designed to cater only to very strong-performing members, several of its design features—including its capped access and short repayment period, as well as the inability to use it on a precautionary basis—limited its usefulness to potential borrowers. The concept of a credit line available for either crisis prevention or resolution and dedicated for only very strong-performing members, with all its flexible features is new. The FCL’s flexibility includes:

• Assuring qualified countries of large and upfront access to Fund resources with no ongoing (ex post) conditions; • Meeting rigorous upfront qualification criteria to signal the Fund’s confidence in the qualifying member’s policies and ability to take corrective measures when needed; • Renewable credit line, which at the country’s discretion could initially be for either a six-month period, or a 12-month period with a review of eligibility after six months; • Longer repayment period (3_ to 5 years versus maximum rollover period of 9 months in the SLF); • No hard cap on access to Fund resources, which will be assessed on a case-by-case basis (the SLF had a cap on access of 500 percent of quota); and • Flexibility to draw at any time on the credit line or to treat it as a precautionary instrument (which was not allowed under the SLF)...

The Coming of the Great Depression

Michael Bordo was parachuted at the last minute into the Council on Foreign Relations New Deal Conference last Monday to make it less hopelessly biased--less of an event that, as one senior Bush I economic policy advisor and rock-ribbed Republican quipped, was the Council on Foreign Relations' attempt "to outbid Heritage as the most biased and least educational thinktank:" He did a good job in talking about infrastructure spending during the Great Depression, and why you would never have expected it to curematters: there just wasn't enough of it:

The 1920s: Bubble, Growth, or Gold? - Council on Foreign Relations: BORDO: Okay, my comments are going to in some respect echo what Dick Sylla said and what the others said.  There are sort of -- there are two principal stories on what cause the Great Depression. One is the failure of the Federal Reserve.  And the second is the gold standard.  And I'll just mention each of those two views briefly....

[W]hen the stock-market boom started, about 1926, the Fed became increasingly concerned about this on real bills doctrine lines. In a sense, they thought that the asset price inflation was really going to be inflationary and that policy should be used to  tighten it, to stop that.  And so they tightened progressively starting in '28. This led to a recession, which started in the summer of '29.  And then the Crash followed the recession.  Okay, and the Crash itself, as everyone and the others have all said, was not the cause of the Great Depression.

In fact, the Fed initially -- the New York Fed initially followed very good policies in October and November of '29.  And they flooded the money markets, the New York money markets, to prevent a liquidity crisis. But then they stopped, in late '29.  And they stopped because there was pressure coming from the board on real bills line, which had said, look, if we keep expanding, we're going to refuel the stock market boom.  And so they checked the tight policy, from that point onwards.  And we know that '30 was a disaster.  It was a disaster because there was a series of banking panics which started in October '31 -- October of '30, and the last one was in '33. And these four panics, okay, were disasters because they did two things:  A, they drastically reduced the money supply, and this reduced spending in prices and output.  And secondly, they destroyed the credit -- they destroyed what Bernanke called "credit intermediation."  And this again had a very negative effect.  Okay?  

And the Fed did not -- the reason the Fed did this -- and there's two stories, there's Friedman and Schwartz, and Bernanke and Meltzer. But you know, one is the real bills story that I told you.  Another is the Fed itself, okay, had some serious structural problems.  There was a sort of continuing conflict between the reserve banks -- and specifically, New York -- and the board in Washington.  So there was a paralysis and the Fed couldn't act to deal with the deflation and depression that was taking place.  Okay. And it didn't end until Roosevelt came in and the banking panic -- and imposed the banking holiday in March 1933, which ended up closing one-sixth of the nation's banks, and so in a sense clearing away the serious problem of bank insolvency.  And also, the last thing that happened, thank God, is that -- and it started getting us out of the Depression -- was the Treasury followed expansionary gold purchasing policies, not the Federal Reserve.  That in a sense led to a recovery that started in '33.  

Okay.  I have a minute, and I want to just mention -- I'll mention the gold.  So the gold standard comes in in a number of ways. The one way in specific is that all the countries in the world are tied together with gold.  When the U.S. goes down, the shock is transmitted to the rest of the world.  Okay, and so we transmit -- the Depression starts in the United States; it's transmitted to the rest of the world. Also, the rest of the world, the small countries and even fairly large countries, have a problem, in that because they had not -- they do not credibly adhere to the gold standard, okay, to the gold- exchange standard and the problems of the gold-exchange standard that  Benn Steil talked about, okay, that they could not follow expansionary policies to get us out of the Depression; that when they did, there would be speculative attacks on their currencies.  

And so they were anchored by what's called golden fetters.    

And the only country that could have gotten us out was the United States, because the U.S. had extremely large gold reserves.  And if they had followed expansionary policies starting in 1930, which they could have done, they had the technology to do so, that could have re- flated the world and prevented the Depression from turning great.  

Jeff Madrick on Infrastructure Spending in the Great Depresion

Jeff Madrick was parachuted at the last moment--as he wrote me, he thought he was the wrong person (the right person would have been someone like Alex Field)--into the Council on Foreign Relations New Deal Conference last Monday to make it less hopelessly biased--less of an event that, as one senior Bush I economic policy advisor and rock-ribbed Republican quipped, was the Council on Foreign Relations' attempt "to outbid Heritage as the most biased and least educational thinktank." He did a good job in talking about infrastructure spending during the Great Depression, and why you would never have expected it to curematters: there just wasn't enough of it:

Infrastructure Spending to Grow: JEFF MADRICK: I want to state this very strongly because I don't think it has been stated strongly enough... enough wasn't spent... there was no net stimulus to the economy when you talk about all that spending.  Let me put that in a little bit of perspective, and I want in particular to emphasize Peter Temin's point about what a deep hole we were in. From 1933 to 1937.. [t]he economy grew at 9 percent a year... GDP equaled its 1929 level by 1937, coming out of an enormous hole.... So when we talk about the depression lasting from... 1930 to 1939, we are seriously misstating it.... You have heard already about unlocking the monetary system, the bank holiday, people were borrowing, leaving their money in banks... Federal Reserve policy was loosened, and there was modest deficit spending in those years....

Keynes talked about a deficit, not the size of government, which is a different issue, but a deficit.... That came at most to something like 5 percent in those mid-1930s years. Nothing serious enough to get us out of that very deep hole in the early '30s, which cut GDP by about 30 percent....

I have to say one other thing about high labor costs and unionization.  A simple fact of life -- the golden age of American growth was the 1950s and 1960s.  The golden age of unionization was the 1950s and 1960s.  The golden age of wage growth in America was the 1950s and 1960s.  The golden age of capital investment was the 1950s and 1960s....

[W]e didn't have roads and bridges.  We had to build them.  And when did we build them?  In the 1930s.  And the good work of Alex Field, for example, suggests that the capital stock of roads and bridges in the 1930s increased by 70 percent.... I don't know many economists who think adequate infrastructure for a modern economy since the industrial revolution in the 1700s will be created by General Electric or General Motors or big oil.It has been created by people getting together and deciding, we've got to build roads and bridges, we've got to build turnpikes, we've got to build railroads.... Government has been the source of major infrastructure investment....

And the smart and well-informed Nick Taylor thinks he has wandered into the wrong discussion:

NICK TAYLOR:  Well, I'm not prepared to argue Henry Morgenthau and whether he was right... as I look over the program this morning I believe I'm the first non-economist on the stage or at least among the panel...